New Zealand has the most generous public superannuation scheme in the world.
Many readers may not believe that claim. I was sceptical when I was told this in the late 1990s by then Social Welfare Minister Roger Sowry. But it appears to be true. Sowry would go around Grey Power meetings and make this claim, and challenge them to find any other country with a more generous public superannuation scheme. He said if they could, he would be happy to swap our scheme for that of the other country.
Grey Power never found one that was more generous. Certainly there were aspects of different schemes that were more generous, but no other country was more generous in its overall scheme. Considering we are far from the most wealthy country in the world, it is no surprise that many consider our current New Zealand superannuation scheme as unsustainable.
The reason the New Zealand scheme is so generous is because of the following five factors:
1. No means test
2. No asset test
3. Eligibility at age 65
4. Linked to the average wage (a couple gets at least 66% of the after tax average wage)
5. Inflation adjusted (in case wage increases are less than inflation)
Labour with its savings policy released yesterday have indicated changes to two of these factors. This is a welcome step for which they should be commended. The only other parties which have been advocating cost cutting to make it more sustainable have been ACT and United Future.
Labour have announced the eligibility age will rise over time to 67. This will only affect people born after Phil Goff was born, so those near retirement will still get superannuation at age 65.
When you look at the details of their policy though, you realise that rather than a total shift in the age, what Labour is really doing is introducing means testing for 65 and 66 year olds. If you are 65 and 66 and not earning, Labour says they will still pay you NZ Super (under a different name).
Introducing the principle of means testing, is another very welcome step. I think it is wrong that we pay millionaires such as Sir Bob Jones, NZ Superannuation. Labour says a 66 year old millionaire should not get NZ Super, which is correct. But the logical argument is that they shouldn't get NZ Superannuation when they are 67 or 68 or even 70. Shouldn't scarce taxpayer money be spent only on those who are not very wealthy?
So Labour have opened the doors for a national debate on both the age of eligibility and on means testing NZ Superannuation. They deserve praise for such a bold step. Our current scheme is too generous and unsustainable.
The other side of their policy is to make KiwiSaver compulsory. Over time every employee will have 9% of their salary paid into KiwiSaver, regardless of their personal wishes. Even if the employee would rather have the money as capital to start their own business, they will be forced into KiwiSaver.
Nominally, the 9% will be a 7% employer contribution and a 2% minimum employee contribution. However the higher employer contribution will result in lower wages (Labour's policy acknowledges this explicitly) and fewer jobs. The higher the cost of labour, the less labour gets hired.
A number of other countries have compulsory superannuation. But in those countries those schemes are the primary source of retirement savings, not the secondary source. Labour is proposing that we continue with a hugely generous (even after the lift in eligibility age) public superannuation scheme plus a compulsory private superannuation scheme.
I've not yet had time to do the detailed analysis, but I am almost certain that if Labour's policy is implemented, it will mean that the average worker will end up with a higher net income in retirement than when they were working. Is this a good thing? No, it isn't actually. The price of that higher retirement income is higher taxes and lower wages (due to the compulsory super) during your working life. When you are working is when you are paying off the mortgage, raising kids etc and have much much higher living costs.
Labour's policy overall has a mixture of good and bad. I think it is an improvement over the status quo, and their willingness to advocate the age change gives them greater credibility. It's a bold start to the campaign to tell New Zealanders that our taxpayer funded superannuation scheme is too generous. It almost reminds me of the Phil Goff of old, and yes that is a compliment.
*David Farrar is a centre-right blogger and affiliated with the National Party. A disclosure statement on his political views can be found here.